Yet another area of unjustified government takeover: the Internet

Patrick Garry, RenewAmerica analyst

An article I wrote twenty years ago described the Internet as America's next frontier. And for the past twenty years, it has been a wide-open, innovative, constantly changing – and yes, somewhat unruly – frontier. But all that may have changed with the Federal Communication Commission's recent announcement that it will now treat the Internet as a public utility, regulated under the same laws that once governed the Ma Bell telephone monopoly.

This dramatic change in the government's regulatory oversight of the Internet is the most extreme expression of the "net neutrality" movement. In basic principle, net neutrality is a concept that commands near universal agreement. Net neutrality refers to an open Internet, free of discrimination based on content. There is no disagreement on that principle – just with the definition of open.

To supporters of the FCC's Open Internet Order, open means an Internet regulated in the name of the purported interests of small users vis a vis the cable and telecom broadband providers. To the opponents of the FCC order, open means an Internet free of government regulation and characterized by flexible, adaptive, and vibrant private competition.

The FCC obviously chose the former notion of open. In ruling that the Internet would henceforth be governed pursuant to Title II of the 1934 Communications Act, the agency changed the Internet from a lightly regulated information service to a much more heavily regulated telecommunications service. Because the 1934 Act conferred near total government control over the AT&T telephone monopoly, it now confers a similar degree of government regulatory power over the Internet.

The arguments in favor of this FCC decision assert that the strongest possible laws are needed to prevent anti-competitive behavior by Internet service providers (ISPs) and to prohibit ISPs from favoring the more entrenched Internet users over the smaller start-ups. Those opposing the FCC action argue that such federal oversight will saddle the industry with outdated regulations and do to the Internet what the same regulations did to telecom – inhibit innovation and competition. As Google Executive Chairmon Eric Schmidt said shortly after the FCC announcement, "the best way to have net neutrality is competition."

The controversy

The FCC action marked a stunning reversal of Internet policies followed during both the Clinton and Bush administrations. An open Internet – one free of heavy government regulation – had enjoyed more than twenty years of bipartisan support. Applying the 1934 Act, however, changes all that, since the Act was designed to empower the federal government to micro-manage the monopoly telephone system.

By characterizing the Internet as a public utility and invoking the 1934 Act, the FCC claims for itself broad, discretionary regulatory powers. It can decide what Internet "charges" and "practices" are "just and reasonable," because the Supreme Court has ruled that if Title II is applied to the Internet, all uses will have to pass the Act's "just and reasonable" test. Moreover, the FCC has added a new "general conduct" catch-all provision giving itself broad oversight of Internet content and business models.

Before now, the Internet has been a "permissionless" forum – anyone could introduce a new website, app, or device without any threat of government review. But now, depending on how the FCC wishes to proceed, regulatory approval may be needed for any new products and services. Not surprisingly, for instance, BlackBerry has already started lobbying the FCC to force Apple and Netflix to offer apps for BlackBerry's unpopular phones.

The irony of the present situation is that many of the same people now supporting the FCC's broad assertion of regulatory authority have formerly, especially in the wake of the Janet Jackson Super Bowl performance, derided the FCC as an inept and insensitive regulator. And given the agency's track record of using executive discretion appropriately, its assurance that it will act with "forebearance" in regulating the Internet hardly inspires confidence.

Another irony is that the FCC regulatory approach could end up hurting those who seem most in favor of it – e.g., Netflix. The FCC did not simply confine itself to regulating broadband providers. It can also review interconnection agreements and network tools that facilitate smooth web functioning, including delivery of Netflix videos, which take up a third of broadband at peak times.

The legal and political reaction

The FCC has announced its decision, but it has not yet released all its findings and proposed regulations. The Open Internet Order lacks any evidence or explanation of why the Internet must now be governed by rules written for the 1930s telephone monopoly. Therefore, it cannot at this time be known how a specific legal challenge might be mounted. But a legal challenge will undoubtedly occur. This is because the FCC may well have violated the arbitrary and capricious test when it suddenly reversed its long-held policy.

Even throughout the Obama tenure, the FCC has dismissed a Title II approach to the Internet. FCC Chair Tom Wheeler had long opposed the drastic step of regulating the Internet as a utility. Last year, when the FCC invited public comments on possible new Internet regulations, only two paragraphs of an 85-page document mentioned the possibility of subjecting the Internet to Title II. And when the FCC last examined the subject back in 2010, it rejected a Title II approach.

It was not until after the President gave a speech last November – demanding that the independent FCC abruptly change course and apply the most extreme form of regulation to the Internet – that the agency did an about-face. But this blatant caving to presidential pressure of an independent agency, whose rulemaking process is supposed to follow objective fact-finding and rule of law considerations and not political pressure, amounts to "arbitrary and capricious" action. In any judicial challenge to the FCC's action, the courts will scrutinize the evidentiary justification for this dramatic change of direction and reverse the action if it was politically motivated.

Another way to challenge the FCC will be through Congress, which can intervene and overrule the agency on substantive grounds. The reasons for overruling the FCC are numerous. First, there is little evidence of any existing harm that the FCC is supposedly addressing. The FCC's proposed plan targets phantom abuses that may never actually materialize. Even the ISPs acknowledge they should not be allowed to degrade or exclude particular content, such as from potential competitors.

A heavy-handed government response to an unproven harm

Net neutrality has so far been the de facto standard characterizing the Internet. Maybe there will be a need for regulation in the future, if ISPs do suppress competition, but the need has not yet occurred. There has been no bifurcation of the Internet into "fast" and "slow" lanes, no discriminatory allotment of fast lanes to preferred users and slow lanes to potential competitors, no charging customers more or less depending on their content.

One of the main issues motivating liberal activists to seek broad FCC regulatory powers is the prospect of ISP's selling fast lanes – or high-speed Internet access – to those preferred users who can afford it. (Under contemplated common carrier rules, ISPs would be prohibited from offering different rates and services for their broadband offerings.) The fear is that new start-ups, for instance, will not be able to compete because they will not be able to afford fast lane access. Not only has this not yet occurred, but there is no evidence that fast-lane access would have such a negative effect. Take the analogy of express lanes on the freeway: charging a fee to those who wish to use those lanes does not harm all those who do not pay the fee. In fact, those paid-access lanes help the average freeway traveler by relieving congestion that would otherwise occur on the non-express lanes.

Those who oppose fast-lane access tend to hold a zero-sum assumption of the Internet – in other words, for every extra speed given to one party some speed must be taken away from someone else, thus relegating those non-payers to a permanently disadvantageous position. The contention is that privileged entities would have the fast lanes, and everyone else would have a degraded service. The assumption is that the non-fee Internet access will not be adequate for whatever purposes the non-fee users have, and that start-ups would not be able to build up a clientele on regular Internet lanes and earn sufficient income to purchase fast-lane access that would then enable it to offer even more services to more customers.

Instead of harming the general public, however, paid fast-lane access may prove to be a benefit. If such fast lanes do not exist and if broadband providers have to move all content at the same speed, high-traffic users like Neflix might clog the Internet for everyone else. Then the ISP's will have to upgrade the whole system to accommodate users like Netflix – but it will not be Netflix who pays for this, it will be the general public.

Underlying President Obama's demand for the FCC to regulate under Title II is a belief that monopolistic ISP's have stunted Internet growth and competition. But in reality, the state of the U.S. Internet is excellent. Speed has increased more than 20 percent in just the last year, and U.S. speeds are among the fastest in the world, while entry-level prices are among the lowest in the world. The U.S. is only one of a handful of countries with three different high-speed Internet technologies – cable, DSL and wireless. And American ISP's invest twice as much per household as their European counterparts do.

Outmoded government regulations

Among the most substantive objections to the FCC action is that it thrusts the Internet back in time, to an era when the telephone was the only person-to-person communication technology, and to an era when AT&T was the only player in a monopolistic telephone industry. The 1934 Act was geared specifically to this AT&T monopoly, and specifically to phone calls as the means of communication. As The Internet Society stated shortly after the FCC announcement, "we are concerned with the FCC's decision to base new rules for the modern Internet on decades-old telephone regulations designed for a very different technological era."

Not only did the 1934 Act never work for telephone – it stunted competition and innovation – it has even less chance of working for the Internet. No one claims that the Internet is monopolized to the degree that the telephone industry was in 1934, and no one claims that digital data over the Internet is equivalent to a telephone call, even though President Obama in his call last November for more regulation seems to equate 1934 telephone services with the 21st century Internet. And unlike other utilities like natural gas and electricity transmission, Internet technology changes rapidly and no one entity has had a monopoly for long.

A related objection is that the FCC has created a great deal of regulatory confusion. Under Title II, almost all web operations will be subject to regulatory control through the "just and reasonable" test laid out in the 1934 Communications Act. But the "just and reasonable" test is a vague and malleable standard. Because of this regulatory uncertainty, broadband providers will be hesitant to make substantial investments.

When the FCC ruled in 2007 that mobile broadband was not a Title II service, thus removing regulatory uncertainty, U.S. wireless investment immediately boomed, increasing nearly 70 percent. On the other hand, shortly after the recent FCC announcement, it was reported that HBO, Showtime, and Sony now fear that regulators will prevent broadband providers from managing smooth delivery of their programs over the Internet. Thus, an uncertain regulatory environment will help Netflix, a regulation advocate, evade new competitors.

Although net neutrality activists wanted the FCC to break up the cable-telecom broadband duopoly, the FCC order may suppress new broadband competitors like Google Fiber by submitting them to Title II rules written for monopolists. In fact, the FCC may give duopolists a new tool to use in blocking competition – e.g., filing a complaint that innovations from new competitors violate the "just and reasonable" test.

The perverse effects of regulation

Another objection to the FCC action is that it will have a perverse effect. Instead of protecting or facilitating competition, it may very well stifle competition by entrenching the prominent players already existing in the industry. As has been repeatedly shown throughout history, sweeping government regulations do not foster a vibrant competition between small-scale actors. History, in fact, teaches that, in a regulated environment, the entrenched companies when threatened by competition will hire as many lawyers as necessary to obtain protective regulations.

When the FCC decides to apply public utility regulations to the Internet, as expected, it basically ensures that the Internet will be a utility, characterized by monopoly players. Utility regulation is designed to maintain, and regulate, the status quo. Indeed, for decades, AT&T used the 1934 Act to prevent any competition.

Big-government regulatory programs, of the type contained in the 1934 Act, end up working hand-in-hand with the biggest corporations in the industry. These big corporations, using high-paid lobbyists and promising big campaign contributions, can use government price controls, utility taxes, and regulations to discourage new entrants and possible competitors. The Dodd-Frank experience shows how a broad federal regulatory program has a depressing effect on smaller businesses. Under that Act, there has been significant consolidation in the financial services industry, with a continual disappearance of smaller banks. (As reported in The Wall Street Journal on March 30, 2015, a new bank opening in Pennsylvania was the first new bank to open since passage of the 2010 Dodd-Frank law, with its regulatory requirements inhibiting new startups, compared with an average of more than 100 new banks opening each year over the course of the three decades preceding Dodd-Frank.). Indeed, Dodd-Frank has actually been a tool for the biggest banks to build a wider moat against smaller competitors that do not have the resources or personnel to decipher, much less comply with, the suffocating web of new regulations.

Complex, burdensome federal regulations do not create an open playing field for new businesses that lack hefty capital assets and regulatory-compliance staff. If anything, complex and costly regulations reduce the competitive field to those entrenched corporations that have the assets and influence to navigate the regulatory terrain. So it is highly dubious that the FCC's invocation of the 1934 Communications Act, enabling it to promulgate near endless regulations, will somehow usher in a new era of small-scale competition on the Internet.

Another perverse effect of the FCC's action may be to encourage increased global regulation of the Internet. For decades, the U.S. has been working for an open global development of the Internet, trying to discourage international regulation that would hamper that development. As President Clinton's FCC chairman, William Kennard, said: "Classifying Internet access services as telecommunications services could have significant consequences for the global development of the Internet." But now, the Obama administration is signaling to the world, and specifically to the United Nation's International Telecommunications Union, that more government regulation of the Internet should be the model.

Consequences for conservatism

Since President Obama took office, he has presided over sweeping government takeovers of various areas of social and economic life. Healthcare, financial services, and now the Internet have all come under broad and near unlimited government control. President Clinton once said that the era of big government was over, but Obama has changed all that. He is trying to put America on a track that not even the New Deal or Great Society was able to achieve.

The federal government takeovers of these areas, as well as an aggressive IRS efforts to punish the political critics of Obama's big-government agenda, reveal what the Democratic Party has now become: an advocate for an America completely defined and supervised by federal agencies.

The net neutrality movement, culminating in the FCC choice of the most extreme form of Internet regulation, also shows how conservative values are being shunned in the hi-tech world. All the technology companies with a stake in the FCC's action were afraid to openly oppose it, for fear they would incur the wrath of liberal activists. Companies like Google, Microsoft, and Apple have not opposed regulations adopted in the name of net neutrality, lest they appear as anything less than fully committed to liberal positions. Instead, they have hoped that the FCC would not go as far as it did, or that Republicans or conservatives would come to the rescue and find a way to block the new regulations.

What this reveals, however, is how unpopular or dangerous conservatism has become in the hi-tech world. But one has to question the reasons for this unpopularity, especially when conservatism believes so strongly in America's innovation culture, and when conservatism tries hard to protect that innovation culture from the constant creep of government control.

© Patrick Garry